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AUDITING
Table of Contents
Answers to Question No. 1    3
a) Possible Sources of Information    3
b) Preliminary Analytical Procedures    3
(c) Outlining Ways for Performing Analytical Procedures    4
(d) Suggestion Regarding Ways of Using Analytical Procedures    5
Answers to Question No. 2    5
a) Minimising the Business Risk    5
b) Auditor’s Responsibility with Regard to Business Risk    6
(c) Highlighting the Business Risks    7
(d) Impact of Above-Mentioned Risk on Financial Statements    8
References    9
Answers to Question No. 1
a) Possible Sources of Information
Telechubbies Ltd is a toy manufacturing company. The auditor before starting the audit needs to understand various preliminary things, which can help him to understand the business, and other things and carry on its audit work effectively. The auditor needs to gain various knowledge from various sources before starting the audit and preparing the audit programme.
The two sources of information required to understand the business is broadly classified into two categories— internal sources and external sources. Before discussing about various sources of audit, it is important to understand the meaning of various sources.
According to Huang (2019), internal sources of information mean getting the information about the company from the company. In other words information from many sources like Annual Report, Quarterly Results, Employees, Management, Financials, internal documents, constitution of the company and information about the financial position and financial performance of the company can gained from Annual Report, Financial Statement, Quarterly results and other disclosure documents. Major source of information about the company can be gathered through its employees as are aware of the business model, transactions and many things else, which are required for conducting Audit.
According to the opinion of Gao (2017), the external sources of information include stakeholders, media persons, creditors, debtors, web search and bloggers. Nowadays, in the globalised world where everything is connected through internet, every information can be sound web. People have started writings blogs about the company its products giving feedbacks, which is also an important source of information for the auditors. In addition, various stakeholders like those that debtors, creditors, are important, and can provide munch needed information such as period, credibility and other such information about the company.
In addition, whether there has been any news about the company in media is also an important source of information. As noted by Almeida and Silva (2019), the auditor should make equal efforts to get information about the company from both internal sources and external sources. Relying only on one source of information can increase audit risk and affect the presumptions that needs to be taken for starting an audit.
b) Preliminary Analytical Procedures
As commented by Yang, Zhou and Wang (2016), analytical procedure refers to applying the knowledge of financial analysis to analyse and gain important information about the position and performance of the company. It includes comparison, trend analysis, ratio analysis and diagrammatic analysis. The objective of this analysis is to identify strong and weak positions about the company’s financials. In the instant case, the company Telechubbies Ltd needs financial support by way of loans & borrowings from banks and for that, the auditor needs to analyse the financial information of the company.
As on 31-12-2021, the loan of the company is $ 20,000 and Equity is $ 16,137, which in other words means the company has a debt equity ratio of 1.24:1. This is far less than the required ceiling limit of 2:1. The company as per this criterion is eligible to get the loan from the bank. Comparing the same ratio for last two years i.e. in 2020 the ratio was 1.10 i.e. $ 16,000 divided by $ 14,505 and 2019 the ratio was 1.03. This shows that the company is leveraging itself and the loan amount has increased however, the company is in a position to gain more loans.
The inventory has increased substantially from $ 7,197 in 2019 to $ 16,498, which is almost double. Such a huge increase in the inventory may be because of increase in business or change in valuation to increase closing stock thereby increasing profit. However, the sales of the company have declined from $ 80,735 in 2019 to $ 72,945 in 2021. This is a case suspicion and needs to be checked and the reasons need to be verified.
The company’s profit has seen a decline trend from $ 7,230 in 2019 to $ 4,502 in 2020 to $ 2,550 in 2021. Such a huge decline in profit with an increase in loan and inventory shows different pictures. Therefore needs to be checked. The trade payables have increased, which means that the company is purchasing more inventory but the same is not able to being sold in the market. In other words, working capital of the company is being struck in inventory, trade payables and receivable leading to liquidity problems. Although, the company has managed to cut costs; however, it is not able to increase the profit.
(c) Outlining Ways for Performing Analytical Procedures
As the figures of the inventory has increased considerably than the external confirmation needs to be made with the purchaser that whether this is due to actual purchase or just valuation has been done in a wrong manner to mislead the stakeholders. Secondly, the loan amount has increased considerably despite decrease in...